Auditor General Jack Wagner Says No Way to Verify Whether $1B in Economic Development Funds Were Well-Spent

Calls for more accountability in Redevelopment Assistance Capital Program

HARRISBURG, Pa., June 27, 2012 /PRNewswire-USNewswire/ -- Auditor General Jack Wagner said today that the commonwealth paid $1 billion in grants to local redevelopment authorities and industrial development authorities over a five-year period, but could not verify whether that money ended up generating jobs and other benefits promised to taxpayers.

Wagner's auditors found that the Redevelopment Assistance Capital Program, which is housed in the governor's Office of the Budget, was plagued with administrative shortfalls including inadequate monitoring and a lack of transparency in how grants—which reimbursed applicants for money they spent—were selected and awarded.

Wagner's auditors found that the governor and selected General Assembly leaders requested more than 3,900 RACP projects totaling nearly $20.9 billion in five capital budgets enacted from 2006 through 2010. From those wish lists and earlier ones, the previous governor and General Assembly green-lighted 506 projects involving 770 separate authorizations totaling $1.5 billion in grant agreements signed during Wagner's primary audit period of July 1, 2005 through June 30, 2010. During the audit period, $1 billion had been disbursed.

Records show that the commonwealth signed grant agreements for 97 projects in Philadelphia County and handed out $213.3 million to the grantees; in Allegheny County, the commonwealth signed agreements for 88 projects and gave the grantees $172 million.

"Job creation is the No. 1 issue to Pennsylvanians," Wagner said. "With money scarce in these difficult budgetary times, state leaders must invest tax dollars prudently and be able to provide concrete data assuring taxpayers that these economic development dollars are being well-spent."

As the Department of the Auditor General wrapped up its audit, RACP was overhauled. The Corbett administration in early June changed the Redevelopment Assistance Capital Program's official name to the Pennsylvania Economic Growth Initiative, and new program procedures were also announced. Wagner commended Gov. Corbett for taking steps to improve the program, but he said that a first look at some of the changes shows that those steps may not be enough. He said that metrics must be developed to evaluate program success. Wagner further noted that the new program procedures have not been audited since they occurred after the Department of the Auditor General had completed its audit fieldwork.

Established in 1984, the Redevelopment Assistance Capital Program grants funds for the acquisition and construction of regional economic, cultural, civic, and historical improvement projects. The program is administered by and housed within the governor's Office of the Budget. RACP funds are disbursed to grantees on a reimbursement basis, meaning that grantees must first spend their own money on project work and then seek reimbursement for eligible expenditures.

RACP is funded from proceeds received from the issuance of general obligation bonds, or debt taken on by the state. Pennsylvania taxpayer dollars pay the bond payments as well as related interest resulting from the debt obligations. In 1987, the program was initially funded with a $400 million bond. Over the next 23 years, through 2010, RACP's borrowing authority had escalated to $4.05 billion, with the most significant increases occurring from 2004 through 2010, when the debt limit increased by $2.5 billion.

Wagner's audit found that, despite being responsible for administering RACP, the Office of the Budget was not privy to criteria used in the selection process, and did not know how or why projects were chosen for funding since the selection process was completed solely by the governor and select members of the General Assembly. Selected projects are itemized in capital budget acts and are eligible to be approved for RACP funding by the governor and members of the General Assembly.

If a project is approved for RACP funding, its selection and funding level are announced through a grant authorization letter that is signed by the Secretary of the Budget. Within six months after the issuance of the grant authorization letter, program applicants must submit a RACP application to the Office of the Budget. That agency then has overall responsibility for monitoring the development and construction of the project and for completing a legislatively mandated close-out audit of the project.

Wagner's auditors highlighted a series of operating deficiencies in RACP, including:

The Secretary of the Budget sent 770 grant authorization letters for 506 projects totaling $1.5 billion in RACP funding, all before the potential grantees even submitted their RACP grant applications.

Vague project descriptions in the capital budget acts made it impossible to determine the exact nature and location of many projects that the governor and General Assembly had deemed eligible for RACP funding.

There was no expiration date for applicants to receive RACP funds once projects were itemized in capital budget acts. An examination of 473 grant authorization letters sent between 2005 and 2010 showed that, on average, 1.6 years passed between the time a project was selected for inclusion in a capital budget and when a grant authorization letter was issued. The actual time passed for each of the 473 projects ranged from 7 days to 21 years.

During the primary five-year audit period, neither the Office of the Budget nor any other commonwealth entity listed any information regarding RACP projects on a state website, or in any other manner, resulting in a lack of transparency for hundreds of taxpayer-funded projects.

The Office of the Budget failed to enforce the six-month application submission requirement. Auditors found that 60 percent of 25 tested applications were submitted late, and the Office of the Budget took no action on its own to terminate the funding offer either to those applicants or, later, to grantees who failed to meet time requirements for grant terms and conditions.

Although RACP was established in 1984 as a tool for economic development, the commonwealth waited until 2003 to require applicants to include an economic impact statement in the application packet. But auditors determined that, even then, the Office of the Budget failed to enforce that requirement. Furthermore, once projects were completed, there was still no entity that actually measured the economic impact—including the number of jobs created—of the finished projects.

While the Capital Facilities Debt Enabling Act clearly defines the types of entities—all non- profit—who are eligible to apply for RACP funding, those entities often serve as conduits for private developers and other for-profit businesses who would not be eligible as the original applicants. Yet, neither the act nor the Office of the Budget places eligibility restrictions on those sub-grantees.

Wagner recommended that the Office of the Budget work with the General Assembly to amend the Capital Facilities Debt Enabling Act to ensure that the RACP project selection process is transformed into a transparent, accountable process. In total, Wagner's report provided 17 recommendations to improve the administration of the RACP program and to make it more accountable to Pennsylvania taxpayers. The recommendations include:

A RACP application must be completed prior to eligibility consideration;

A public announcement should be made about each eligible project selected for RACP funding and the reasons for the selection;

At least one public meeting subject to the Sunshine Act should be hosted by the Office of the Budget staff to give taxpayers the opportunity to provide input on projects' economic impact in their communities;

Capital project lists should include a specific description of the capital project, including the municipality where the project is located;

Expiration dates should be placed on projects listed in the capital budget acts to show that economic development is a priority;

The Office of the Budget should ensure all RACP grant applications are completed timely, and the Office of the Budget should reject any application that does not contain a fully completed economic development statement.

Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly. He is the commonwealth's elected independent fiscal watchdog, conducting financial audits, performance audits and special investigations. The Department of the Auditor General conducts thousands of audits each year. To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department's website at www.auditorgen.state.pa.us.